Why Apple Could Win Big With Tesla’s Giant New Battery Factory

Tesla says it wants the Gigafactory, shown here in a mock-up released by the company, to be powered by solar and wind. Source: Tesla.

This article was written by Wired.com -- the leading provider of technology and innovation news.

The first Tesla (NASDAQ: TSLA) I ever saw was stripped down to the chassis, a bare-metal incarnation of the company's flagship electric Roadster on display at an event in Silicon Valley. Without the need for an internal combustion engine, the two-seater's petite frame was dominated by a huge battery. My first thought: "This looks like a giant cell phone on wheels."

As it turns out, I was more right than I realized.

This week, years after that first sighting, Tesla announced plans for what it calls the "Gigafactory," a 10-million-square-foot plant for making car batteries. The company hopes that the sheer scale of the operation, combined with the inventiveness of its engineers, will bring battery prices down far enough to finally bring its electric cars into the mainstream.

But it's not just the prospect of a gasoline-free future that has sparked such excitement about the Gigafactory. The same basic lithium-ion tech that fuels Tesla's cars also runs most of today's other mobile gadgets, large and small. If Tesla really produces batteries at the scale it's promising, cars could become just one part of what the company does. One day, Tesla could be a company that powers just about everything, from the phone in your pocket to the electrical grid itself.

Earlier this month, as rumors swirled that Apple (NASDAQ: AAPL) might want to buy Tesla, San Francisco Chroniclereported that Tesla CEO Elon Musk had indeed met with the iPhone maker. Musk later confirmed that Tesla and Apple had talked, but he wouldn't say what about.

Now that Tesla has announced the Gigafactory, Gartner auto industry analyst Thilo Koslowski thinks it would make more sense for Tesla to talk with Apple about something other than an acquisition. "Depending on the capacity of the factory and who the other investors will be, Tesla could start selling its batteries for other products besides cars," Koslowski tells WIRED. "This could actually mean Tesla might build batteries for Apple."

Better batteries for less moneyTo begin erecting its factory, Tesla said it would seek $1.6 billion in debt financing — money that Apple itself could easily supply from its massive cash reserves. In fact, the world's biggest company could easily put up the money for the entire Gigafactory, which Tesla estimates will ultimately cost between $4 billion and $5 billion. Though industry analysts say the global manufacturing capacity for consumer electronics batteries is already considerable, the economies of scale that Tesla is promising could give Apple access to a whole different level of efficiency, sophistication, and control.

Unlike many parts of the consumer electronics industry, battery-making factories are, in general, highly automated, which means that labor doesn't factor significantly into production costs. As anyone who has seen Tesla's car-making robots in action can attest, factory automation is something the company does really, really well. Deep involvement in the project from the start — say, as an investor — could give Apple exactly the kind of intimate involvement with a key supplier that it relishes. This sort of control defines its approach to products. For consumers, that could mean Apple getting better batteries for its devices for less money, just like Tesla wants to do for its cars.

Even if the Gigafactory never makes a battery for a single iPhone, however, its impact on the future of energy storage could be huge. The company says that, once fully operational, the plant will more than double the volume of lithium ion batteries produced in the world today. Sam Jaffe, a battery industry analyst with Navigant Research, says the price drops predicted by Tesla are in line with his firm's forecasts, and that the cheaper batteries will bring Tesla closer to achieving its primary mission of making a widely affordable electric car, what Tesla is calling its "Gen III" mass market vehicle, or Model E. "The whole point of that model and the whole point of the company was to make that car," Jaffe says. "It wasn't to make sports cars or luxury cars. It was to make a family car comparable in price to a gasoline model."

To reach that mass market, Tesla hopes to be cranking out batteries for 500,000 cars per year by 2020, supported by the Gigafactory. That's compared to the 35,000 Model S sedans Tesla expects to make this year. Reaching that goal would mean not only a lot more electric cars on the road but a lot more batteries that would need to be replaced. The batteries that power Teslas are a lot like smartphone batteries: Eventually, they start losing their strength. Unlike smartphone batteries, getting down to 60 or 70 percent of their full capacity isn't just inconvenient. It could leave drivers stranded. Tesla says it plans to fully integrate battery recycling into the Gigafactory's operations, which could add to the cost savings.

Powering the gridBut Koslowski says those old batteries could also become part of a robust secondary market. They could, for instance, store energy generated by home solar grids, which can make use of less-than-full strength cells because they don't have to go anywhere. Already Tesla is supplying battery packs to SolarCity (NASDAQ: SCTY) , the solar installer of which Musk serves as chairman, and the company believes that one day its batteries could even serve as backup energy sources for utilities themselves. Bullish Wall Street analysts even predict that, in addition to buttressing the renewable energy grid, Tesla could combine its expertise in cars, batteries, and digital technology to become a leading maker of self-driving vehicles.

Any of this coming to pass, of course, depends on whether the Gigafactory will actually accomplish what Tesla says it will. To bring prices down, battery industry consultant K.M. Abraham says, Tesla will have to figure out how to make its batteries without pushing up costs for component suppliers who would have to increase their output to meet the car maker's demands. "Unless you come out with new low-cost materials, the battery prices will remain pretty much the same," says Abraham, who is also a professor of renewable technology at Northeastern University.

Though details from Tesla are scant, a diagram released by the company suggests it does plan to bring as much of the battery making process as possible within the Gigafactory's walls. Tesla is also pledging to power much of the plant with its own wind and solar energy, a potential testing ground for using its batteries as part of the electrical grid. Diversifying into different uses could be especially crucial if demand for Tesla's cars doesn't hit the company's own projections. Building a factory on such a massive scale is a huge risk if it only makes one thing, but that risk diminishes if Tesla has the ability to use its expertise to make batteries for many uses. If nothing else, Tesla is creating an unprecedented space just to see what's possible when energy becomes mobile.

"It's breathtaking, just the sheer size of it," Jaffe says of the Gigafactory. "This is so beyond anything by comparison."

Let's face it, every investor wants to get in on revolutionary ideas before they hit it big. Like buying PC-maker Dell in the late 1980's, before the consumer computing boom. Or purchasing stock in e-commerce pioneer Amazon.com in late 1990's, when they were nothing more than an upstart online bookstore. The problem is, most investors don't understand the key to investing in hyper-growth markets. The real trick is to find a small-cap "pure-play", and then watch as it grows in EXPLOSIVE lock-step with it's industry. Our expert team of equity analysts has identified 1 stock that's poised to produce rocket-ship returns with the next $14.4 TRILLION industry. Click here to get the full story in this eye-opening report.

The Motley Fool recommends Apple, SolarCity, and Tesla Motors. The Motley Fool owns shares of Apple, SolarCity, and Tesla Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment icon found on every comment.

At least give Tesla the credit to have the balls to take on the big oil and big car companies to get off of oil which is messing up the earths climate .

I'm sure big auto and big oil companies are trying to fight back ( under the radar ) to try and prevent Tesla from taking money away from them and it's good to see Tesla ( Elon Musk ) do something to try and make this world a better place to live in .

With the Tesla supercharging stations being built all across the country ( plus in other countries ) they provide FREE recharging to all Tesla owners .

I read an article recently that mentioned a Tesla car battery can power a normal size house for 3 to 4 days . I can see a time soon where a Tesla owner could plug in a cable from the parked car and power his home and when the charge is low in the car battery just drive over to the local supercharger station and charge up for Free drive back home and as long as the car is parked there plug the adapter from the house back to the car and continue powering the house while the car is not being used .

Homeowners could reduce the monthly power bill by 50 % or more doing this .

It could be a wild success and Tesla might start resembling a monopoly. However it could be an epic fail. Maybe they can come from behind to be a leader in technology. Teslas track record on batteries has been lousy and they have been lighting behind on technology. Tesla tends to be reactive instead of proactive. Hope they make better and safer designs than they have in the past.

Tesla claims to have 78 superchargers. Hawthorne, Tejon Ranch and maybe one or two more have solar panels; none have battery back-ups. The modest panels over the parking spaces are woefully inadequate to power even occasional use for recharging.

Jonas imagined Tesla is going to disrupt the electric utility industry. Hilarious. Li ion is an inferrior chemistry for load leveling/balancing. Watch Musk and Rive at the CPUC panel 0n 2/27; they may be able to knaw around the edges by duping naive retail homeowners but they come across as clueless in the regulated utility arena.

Tesla's batteries are low tech but cheap and about to get a lot cheaper with the giga-facotry. Not a good fit for Apple.

Every week for the last 20 years there is a press release about a new battery that will revolutionize energy storage. How can you tell a battery scientist is lying? When he moves his lips or issues a press release.

The genius in Tesla battery packs is in the software battery management.Very appropriate for home solar and commercial solar.

Only a few superchargers have solar roofs. Because they are going with bare minimum to get the network in place. Eventually there will be enough Tesla purchased solar panels to offset all supercharging, but not all of it will be onsite at superchargers. That is impossible.

The taxpayers in Michigan have already taken a financial bath for the multi million dollar battery plant for the Chevy Volt that was built in Flint Michigan and never produced one battery. Why is the Tesla battery design any different ?

In addition to the efficiency limitations, we have an even more troubling question as to the safety of the Volt's technology. GM keeps a team of Hazmat specialists on call to respond to any Onstar notifications of accidents involving a Volt. Firefighters, unless properly trained, must stay away from the complex, volatile power source which has more than 600 seals and cooling components to keep it safe. In fact, according to Josh Payne who worked on the first Volt battery and is now senior engineering manager at Energy Power Systems, "That's 600 seals that all have to stay for the entirety of its life otherwise you have catastrophic failures." That does not sound too reassuring!

The worst part of this mostly-untold story is the taxpayer money that continues to be wasted on the green pipe dream. The American people were lied to about the potential for the Chevy Volt, as well as for the technology behind it. Billions of dollars were spent on grants and failed loans for production of plug-in EVs, lithium-ion batteries and charging stations. Wealthy purchasers of $40,000 Chevy Volts and $100,000 Teslas receive federal tax credits for $7,500 each. Subsidized battery makers like A123 Systems are bankrupt and government-supported, green automaker Fisker is not far from it. How are middle-class or poor Americans benefiting from any of this?

The evidence that taxpayer money is blatantly wasted on a misguided green agenda continues to build, yet few in the media or in Washington question the waste. The guilt lies with both Democrats and Republicans, neither of which seem to want to take a logical approach to our country's fiscal and energy needs. And you can be sure that politicians will continue to receive lobbying money from those cronies that are being enriched while taxpayers foot the bill for Obama's green energy scam.